Life Insurance Smarts: Mortgage Reducing Vs. Level Death Benefit

by Guest Author on November 4, 2013

When you take out a mortgage to buy a house, the mortgage lender will usually offer you two kinds of insurance – private mortgage insurance (PMI) and mortgage reducing term insurance (usually simply called mortgage life insurance). Should you accept such an insurance policy or should you buy a regular life insurance policy, instead?

Buying insurance from your mortgage lender

When a mortgage lender offers you private mortgage insurance to go along with a mortgage, it is meant to cover your mortgage obligations for several months, should you default on your payments for reasons of lost employment or something similar. In other words, it protects the mortgage lender’s interests, not yours. Usually, if a lender brings a PMI policy up, it isn’t optional. These policies are usually a part of the mortgage deal when your down payment is smaller than 20% of the value of the home you are buying.

The second type of insurance – mortgage life insurance – is designed to pay whatever remains of your mortgage, should you pass away or become incapacitated at some point. Mortgage life insurance is optional. It works like regular life insurance, except that your family doesn’t collect a check if you pass away. Instead, the mortgage lender gets a check for whatever it is owed. Your family won’t have to worry about losing their home.

Buying a regular insurance policy

A level death benefit term policy or level term life insurance is the simplest kind of life insurance that you can buy. When you buy such a policy, you tell the insurer how long you would like to be covered.

Many people buy 25-year policies when they are 25 years old, or so. Most families only need insurance protection during this period. Should an income earning parent pass away before the children are grown up, educated and ready to leave home, it could be catastrophic. When breadwinner survives to be 50 or 60, he has usually had time to see his children grow up to be self-sufficient and also save enough money to protect against life uncertainties. He doesn’t need insurance after that point.

Since these policies cover people when they are young, strong and unlikely to die, they are cheap. In other words, they are tailor-made for young families.

Whole life insurance policies cover people for as long as they live – not for a specific term. These policies, though, are far more expensive than level term life policies. Whole life policies aren’t the best idea for young families, because they charge stiff premiums and offer a kind of protection that these families don’t really need.

As a homeowner, should you sign up for mortgage life insurance or level death benefit term insurance?

When you consult insurance experts on services, they generally don’t approve of narrowly circumscribed insurance policies that take care of just one kind of liability.

When you plan for to protect your family in the event of your death, you need to think not just of the mortgage, but of everything that they will need – money to live on, medical expenses, and so on. You could easily buy a large level death benefit term insurance policy to cover the mortgage and also money to support your family with. These policies are very inexpensive, even for large sums of money.

Tom Grant was a life insurance advisor at Kanetix for many years. He now likes to share his experiences by blogging on the Internet.

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